Revising the Information Technology Act, 2000

by Rishab Bailey, Vrinda Bhandari, Renuka Sane and Karthik Suresh.

The Information Technology Act, 2000 ('IT Act') is a comprehensive law enacted to build trust in the digital ecosystem by regulating e-commerce, e-filing of documents, and by creating criminal offences applicable to the digital ecosystem. Despite amendments in 2009, it is widely considered that the IT Act is outdated, not least due to the proliferation of the Internet and a range of new technologies (e.g. Bahl, Rahman and Bailey 2020; Nappinai 2017; Nigam et al 2020). Recently, the government has proposed replacing the IT Act with a new legislation known as the 'Digital India Act'.

In a new report, Revisiting the Information Technology Act, 2000, we attempt to contribute to the process of revision of the IT Act, by examining four critical issues pertaining to the online ecosystem. These are:

1. Censorship: The provisions in the IT Act pertaining to censorship and blocking were framed in an era when the digital ecosystem was not as pervasive as today and before the use of social media platforms exploded. The provisions in the IT Act that empower the government to block content from public access are largely based on Article 19(2) of the Constitution. However, the institutional framework for carrying out blocking suffers from significant lacunae, including a lack of accountability of the relevant oversight institutions. We recommend that appropriate procedural safeguards be introduced through statute, to ensure greater transparency and neutrality in the blocking processes.
2. Intermediary liability: The IT Act protects intermediaries from prosecution for content posted or transmitted by third parties upon the following three conditions: (a) that they act as passive agents (or distributors) of content, (b) they disable access to unlawful content upon receiving 'actual knowledge' thereof, and (c) they observe 'due diligence' conditions laid down by the government. The 'safe harbour'' provision was introduced at a time when the digital ecosystem was still nascent. The variety of online harms that have since proliferated raise questions about whether such a system is required. We find that there is value in retaining a safe harbour for intermediaries in contexts where they have played a passive role in the ecosystem. Removing safe harbour is likely to incentivise greater private censorship, a role that intermediaries are not well positioned to undertake. However, this does not mean that intermediaries should not be responsible for ensuring the safety of the digital ecosystem. Any further obligations (such as greater transparency, the introduction of grievance redress mechanisms, etc.) ought to be implemented outside the safe harbour framework and certainly not as part of amorphous 'due diligence' obligations. We point to how new intermediary rules introduced in 2021 and 2022 have imposed a variety of new and onerous obligations on intermediaries. Many of these obligations, such as the obligation to enable traceability of the originator of information on messaging platforms and the obligation or the need to practically police a host of proscribed content, should be done away with. Any new obligations must be introduced based on evidence of harm in a proportionate manner.
3. Surveillance: The current framework pertaining to interception and monitoring of digital communications was established before the seminal decision of the Supreme Court in Justice K Puttaswamy vs. Union of India which recognized privacy as a fundamental right. Our report builds on the literature on surveillance reform in India to suggest that significant revision is required in our legal framework. Currently, the executive is provided extremely broad powers with insufficient safeguards to mitigate abuse. Certain surveillance programs such as the Centralised Monitoring System are per se disproportionate as they conduct mass surveillance. Our primary recommendation is therefore to enact a new stand-alone surveillance-related legislation, which could harmonise surveillance processes while ensuring that appropriate procedural and institutional safeguards are implemented. In the alternative, the revised IT Act should narrow the scope of powers given to the executive, while also implementing workable oversight and accountability mechanisms, not least ensuring judicial review, legislative oversight, and greater accountability of relevant bodies involved in the surveillance apparatus.
4. Cybersecurity: While the IT Act lays down various offences pertaining to cybersecurity that are broadly in accordance with international standards, we find that there is a significant need for reform of the institutional mechanisms that manage incident reporting and response. We recommend that the revised IT Act clarify the role and powers of CERT-in and NCIIPC --- the two primar cybersecurity-related agencies in India. In particular, their rule-making powers should be clarified/limited. The law should also avoid duplicating functions of each agency while limiting incident reporting requirements to large and systemically important systems and entities --- this avoids imposing disproportionate costs.

As we move towards an economy that is ever more dependent on the digital ecosystem, it is vital that the law promotes trust in the online ecosystem. This involves finding an appropriate balance between a range of competing interests --- national security and public order, the need to protect fundamental rights, and the need to promote innovation in and development of the digital ecosystem. Finding such a balance will require the government to take a considered stance on several thorny issues. Carrying out detailed and inclusive consultations will also be a vital part of the process towards establishing the digital ecosystem on a sound legal footing.

References

Varun Sen Bahl, Faiza Rahman and Rishab Bailey, Internet intermediaries and online harms: Regulatory Responses in India, Data Governance Network Working Paper no. 6, March 2020.

N S Napinnai, Cyber security and challenges: Why India needs to change IT Act, February 2017.

Aniruddh Nigam, Kadambari Agarwal, Trishi Jindal, Jaai Vipra, Primer for an Information Technology Framework Law, Vidhi Center for Legal Policy, September 2020.

Rishab Bailey, Vrinda Bhandari, Renuka Sane, Karthik Suresh, Revisiting the Information Technology Act, 2000, XKDR Forum, March 2023.

Rishab Bailey and Karthik Suresh are researchers at XKDR Forum. Vrinda Bhandari is a practising advocate. Renuka Sane is a researcher at TrustBridge.

Management takeover under SARFAESI Act - A zombie law

by Pratik Datta.

Introduction

Ever since Caballero et al (2008) coined the phrase, ‘zombie firms’ have attracted much attention in both academic and policy circles. Macey (2021) recently extended the concept to a wholly new genre of zombies - ‘zombie laws’. Freedom from the clutches of zombie laws is a policy priority for India. The Prime Minister himself highlighted the challenge in his recent Independence Day speech. This piece will use the phrase ‘zombie laws’ broadly to refer to provisions of statutes, regulations, and judicial precedents that continue to apply after their underlying economic and legal bases dissipate. Although there are many obvious examples of zombie laws strewn across the Indian legal landscape, this post will illustrate the problem using a slightly more nuanced example. It will explain why section 13(4)(b) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’) has become a zombie law since the enactment of the Insolvency and Bankruptcy Code in 2016. To appreciate the original rationale behind this provision, it would be useful to set out the broader legislative backdrop.

Background

Section 69 of the Transfer of Property Act, 1882 allows only some mortgagees the right to sell the mortgaged property (security) without court intervention. This right is not available where the mortgagor is of native origin or where the mortgaged property is situated outside presidency towns or any notified area. This legislative design at the time was meant to ensure that the law does not inadvertently empower unscrupulous moneylenders (as mortgagees) against vulnerable native mortgagors in mofussil towns and villages across India. In contrast, European mortgagors in presidency towns were presumed capable enough to take care of their own interests.

Post-independence, this limited right to sell mortgaged property without court intervention proved unsatisfactory for a state-led financial system. Instead of reforming the general law, the Transfer of Property Act, special statutes were enacted to vest the power of sale without court intervention in certain financial institutions like Land Development Banks and State Finance Corporations (‘SFCs’). For example, section 29 of the State Finance Corporations Act, 1951, empowered an SFC to take over the management, possession, or both, of the borrower industrial concern for recovery of its dues. If the borrower still didn’t pay up, the SFC could sell the unit to recover its dues.

In late 1990s, demands were made to extend similar powers to banks and financial institutions to tackle the fledgling non-performing assets problem. This demand resonated with the Andhyarujina Committee, which in March 2000 recommended a special law to empower banks and financial institutions to take possession of securities anywhere in India and sell them for recovery of loans without court intervention. The SARFAESI Act 2002 was the result of this policy thinking.

Section 13 of SARFAESI Act empowers a secured creditor (bank or financial institution) to enforce a security interest created in its favour without court intervention anywhere in India. On default by a borrower, the creditor may serve a notice in writing to the borrower to repay in full within 60 days of receiving such notice. If the borrower fails to comply, the creditor may take recourse to various measures under section 13(4). Clause (b) of section 13(4) initially empowered banks and financial institutions to take over management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured assets.

In 2004, section 13(4)(b) was amended to empower banks and financial institutions to take over not only the ‘management of the secured assets’, but the entire ‘management of the business’ of the borrower company without court intervention. This includes the right to transfer by way of sale for realising the secured assets. These powers were not originally envisaged by the Andhyarujina Committee.

A Zombie law

In 2000, the Andhyarujina Committee had envisaged the SARFAESI Act as an exception to the general foreclosure law contained in the Transfer of Property Act. Consequently, SARFAESI Act was designed as a special foreclosure law. Like any other foreclosure law, it dealt only with transfer of security (mortgaged property) and not transfer of corporate control of the borrower’s business from shareholders to creditors (or an administrator). The latter is the subject of corporate insolvency law.

When a corporate debtor faces financial distress, shareholders have a perverse incentive to engage in risky strategies. If the strategy pays off, shareholders benefit. If the strategy fails, the creditors bear the losses. To address this moral hazard inherent in the structure of a limited liability company, corporate insolvency law shifts the power to decide on the future of a financially distressed company from its shareholders to its creditors. The creditors could use insolvency law to either restructure their debt in the company or sale the business as a going concern to a third party. This enables the business to exit financial distress with minimal value destruction.

To achieve this outcome, corporate insolvency laws usually provide sophisticated rules to facilitate collective bargaining by the company’s creditors for debt restructuring, appoint an administrator (resolution professional) to monitor a sale, and market the business publicly to maximise the sale value. They also provide various safeguards to check against unfair wealth transfer away from vulnerable claimants of the corporate debtor such as dissenting financial creditors and operational creditors. These safeguards include several unique provisions dealing with preferential transactions, avoidance transactions, wrongful trading, cram down provisions etc. Implementing these safeguards require court supervision.

Foreclosure laws do not require such complicated rules and safeguards since they simply deal with transfer of security and not transfer of corporate control. As a result, court supervision is not as relevant in foreclosure laws. Since SARFAESI Act was initially designed as a special foreclosure law, neither did it provide for the usual safeguards necessary during transfer of corporate control nor did it mandate court supervision to protect vulnerable claimants during such transfers.

The 2004 amendment fundamentally altered this basic design of SARFAESI Act as a foreclosure law. The amended section 13(4)(b) empowered a secured creditor to take over control of the corporate debtor’s business and decide on its future through a sale, a function akin to that of a corporate insolvency law. Yet, unlike a corporate insolvency law, the amendment did not introduce any safeguard or court supervision during takeover of management and subsequent sale of the distressed business. Effectively, the 2004 amendment inserted selective features of corporate insolvency law within a foreclosure law. As a result of this legislative mashup, the amended SARFAESI Act vested disproportionate powers with secured creditors, without safeguarding the interests of other claimants of a corporate debtor. This is not expected of either a foreclosure law or a corporate insolvency law.

This hybrid section 13(4)(b) of SARFAESI Act could have been justified in 2004 as a mechanism to achieve going concern sale of distressed businesses in the absence of a modern corporate insolvency law in India. In 2016 however, India got a comprehensive corporate insolvency law - the Insolvency and Bankruptcy Code (‘IBC’). The IBC now provides a well-defined mechanism to take over management of a distressed corporate debtor to achieve a going concern sale.  On triggering the IBC, the promoter loses control of the corporate debtor. A resolution professional takes over the management, invites plans from potential investors, and places the eligible plans before a committee of financial creditors. This committee can approve a resolution plan by not less than 66% voting share. Such a resolution plan becomes binding only after it is approved by the court (adjudicating authority). Given such elaborate mechanism (with appropriate safeguards) to achieve going concern sales under the IBC, the underlying economic and legal bases for section 13(4)(b) of SARFAESI Act have dissipated. Yet, when SARFAESI Act was amended in 2016 to harmonise it with the IBC, section 13(4)(b) was not revisited. This provision lives on in the statute book only as a zombie law.

Continued existence of such a zombie law is not only unnecessary but it can also be harmful. For instance, the IBC provides stringent safeguards to prevent unfair wealth transfer from dissenting financial creditors and operational creditors. In contrast, section 13(4)(b) of the SARFAESI Act is designed to protect only the interests of secured creditors. It does not offer any credible safeguard for other claimants of a distressed corporate debtor. Therefore, continued use of this section of the SARFAESI Act to take over the management of a distressed corporate debtor without court intervention is detrimental to a wide range of corporate stakeholders.

This problem could be resolved simply by amending section 13(4)(b) to revert to its pre-2004 position. Banks and financial institutions should be able to use section 13(4)(b) only to take over the ‘management of the secured assets’ of the corporate debtor without court intervention and not the management of its entire business. The latter should be permissible only under the IBC. This legal architecture would restore the character of the SARFAESI Act as a special foreclosure law, as originally recommended by the Andhyarujina Committee.

Conclusion

Section 13(4)(b) of SARFAESI Act became a zombie law with the introduction of the IBC. Many such zombies remain scattered across the Indian legal landscape. The government had in 2014 taken a conscious initiative to repeal such laws. Such initiatives are mostly ad hoc. There is no institutional mechanism to tackle the menace. While highlighting this lacuna, former Finance Secretary Dr. Vijay Kelkar suggested that every new economic legislation should ideally have a sunset clause. Incorporating such clauses could nudge the development of requisite institutional capacity to periodically review parliamentary laws and check the rise of the zombies.

Pratik Datta is a Senior Research Fellow at Shardul Amarchand Mangaldas & Co. All views expressed are personal. The author thanks Rajeswari Sengupta, Ajay Shah and two anonymous referees for their useful suggestions.

Indian Supreme Court on virtual currency: Regulatory governance implications

by Pratik Datta and Varun Marwah.

The Indian Supreme Court in IMAI v. RBI (‘Crypto Judgement’) recently struck down a Reserve Bank of India (‘RBI’) circular that prohibited entities regulated by it from dealing or settling in Virtual Currencies (‘VCs’). While many commentators have lauded the outcome, the judgement itself is a milestone in the history of jurisprudence on rule of law and the working of regulators in India.

In this blog, we contextualise this decision in the broader context of regulatory governance in India. We argue that this decision may not be sufficient to nudge regulators to improve their internal governance arrangements. Instead, deeper legislative reforms are needed along the lines of the US Administrative Procedure Act ('APA') and the draft Indian Financial Code ('IFC').

Regulatory governance in India

When India embarked on a market oriented reform in early 1990s, there was a desire to break away from central planning and government control towards creation of competitive private markets in different sectors. This led to proliferation of specialised statutory regulators across sectors. The dominant motive behind setting up new regulators was to signal credibility to private investors and financial institutions. Another important objective was to create technocratic specialisation, which would have been difficult within the administrative constraints of government departments. Given these priorities, there was hardly much focus on regulatory governance, that is, the formal processes to be followed by a regulator while performing its internal functions. Consequently, the parliamentary statutes setting up these regulators did not provide much guidance on regulatory governance.

Lack of regulatory governance often leads to poor regulatory outcomes. For instance, Roy et al (2018) explains that poor legislative processes within a regulator may prevent its board from systematically evaluating the management’s proposals to regulate. It may also restrict the board from receiving appropriate feedback from regulated entities about proposed regulations. Therefore, one would have reasonably expected the Indian regulators to voluntarily adopt such regulatory governance norms through regulations.

However, the regulators did not make any systematic effort to improve their own regulatory governance. Krishnan and Burman (2019) note that the administrative processes within regulators are strikingly similar to those of government departments. This is because, at least in the initial days, most members as well as officials of these regulators came from the government. In absence of any statutory guidance, they transplanted the administrative processes of the government into the regulators. This became a source of deeper problems.

A statutory regulator is materially different from a government department. Unlike a government department, a regulator concentrates legislative (regulation-making), executive (monitoring and supervision) and judicial (issuing orders) powers. Moreover, the frequency and volume of legislative instruments issued by a regulator is significantly higher than most government departments. None of these unique features of a regulator are addressed by transplanting government processes within the regulator.

Given this vacuum in regulatory governance both in external administrative law (the statute) as well as in internal administrative law (regulations, circulars etc.), judicial precedents came to play a visibly important role in shaping regulatory governance in India. An analysis of these judicial precedents by Krishnan and Burman (2019) reveals two interesting features. First, the judiciary has generally been deferential towards the functioning of regulators, except in cases of blatant disregard of process. Second, judicial review of legislative actions of regulators has been rare. Even in such rare occasions, the ultra vires doctrine has been used to strike down regulations issued without appropriate legal powers. To the best of our knowledge, the only instance where the Indian Supreme Court struck down a regulation for inadequate regulatory governance was in COAI vs. TRAI ('Call Drop Judgement') in 2016. And now, the Crypto Judgement adds to this nascent jurisprudence.

The Crypto Judgment

On April 6, 2018, the RBI issued a circular prohibiting RBI regulated entities from dealing or settling in VCs (‘Circular’). The Circular was challenged by the Internet and Mobile Association of India (‘IMAI’) before the Supreme Court. The court struck down the Circular for infringement of Article 19(1)(g) of the Constitution of India. Article 19(1)(g) guarantees the fundamental right to conduct trade and business in India subject to reasonable restrictions that may be imposed by law in public interest. The Apex Court held that the prohibition in the Circular was an unreasonable restriction on this fundamental right to trade (in VCs and to operate VC exchanges) in India, because it was disproportionate.

The Apex Court found the Circular to be disproportionate primarily on two grounds:

First, RBI did not adduce any cogent evidence of the likely harm that its circular sought to address. RBI had not found the activities of VC exchanges to have actually adversely impacted any RBI regulated entity. In case any such harm was actually caused, the court expected at least some empirical data about degree of harm suffered by the regulated entities. In the absence of any such harm or any empirical data establishing the degree of harm to regulated entities, the court found the absolute ban on trading of VCs and functioning of VC exchanges to be disproportionate.

Second, RBI did not consider any less intrusive alternative regulatory response. An Inter-Ministerial Committee had initially suggested that an absolute ban would be an extreme tool. This Committee had observed that the same objectives could be achieved through less intrusive regulatory measures, as reflected in the Crypto-token Regulation Bill, 2018. Referring to this observation as well as several other authoritative international sources such as the European Parliament and the Financial Action Task Force ('FATF'), the court found that RBI did not consider the availability of alternatives before issuing the Circular imposing an absolute ban. Consequently, the Circular was held to be a disproportionate measure.

Both these reasons suggest that the Supreme Court expected the RBI to perform a basic Cost-Benefit Analysis ('CBA') before issuing the circular. A CBA would have enabled the RBI to identify multiple possible solutions to the problem and then choose the most appropriate one. Statutory laws in most advanced jurisdictions usually require regulators to conduct a CBA before issuing a regulation. In contrast, Indian laws do not impose such high regulatory governance standards on regulators. But this may soon need to change.

A nascent trend

As highlighted by Krishnan and Burman (2019), judicial review of legislative action by a regulator is rare in India and in the rarest of the rare cases, such judicial review hinges on regulatory governance standards. The Crypto Judgement is one such rare instance. To the best of our knowledge,the only other instance was in COAI vs. TRAI (‘Call Drop Judgement’) in 2016. In that case, the Supreme Court had similarly struck down a regulation issued by Telecom Regulatory Authority of India ('TRAI') for inadequate regulatory governance.

The Telecom Consumer Protection (Ninth Amendment) Regulation, 2015 required telecom operators to credit Rs. 1 to a calling customer for a maximum of three call drops per day. A number of telecom operators challenged this regulation for violation of Article 14 (arbitrariness) as well as section 11(4) of the TRAI Act, 1997, that imposes a broad legal obligation on TRAI to act transparently. The Supreme Court held TRAI’s action to be arbitrary since it had failed to substantiate how it arrived at a compensation amount of Rs. 1 and that too only to the calling customer. The court concluded that the regulation was based on mere guess work without any intelligent care and deliberation.

Further, the telecom operators had raised these issues in public comments, but TRAI had failed to consider their arguments while framing the regulations. Relying on the transparency requirements under section 11(4), the court held that TRAI should have responded in a reasoned manner to those comments which raised significant issues. Evidently, the Supreme Court struck down the call drop regulation due to inadequate regulatory governance standards in issuing regulations. For this, the court resorted to a broad interpretation of the transparency obligation under the TRAI Act, 1997.

In contrast to the TRAI Act, 1997, the RBI Act, 1934 does not explicitly impose any statutory obligation on RBI to be transparent or proportionate in regulation-making. The Supreme Court in the Crypto Judgement applied the general administrative law principle of proportionality to strike down the Circular. This has now set a precedent for holding regulators accountable while exercising their legislative powers, irrespective of whether their parent statute explicitly imposes any obligation of transparency or proportionality while issuing regulations.

Potential consequences

These two precedents undoubtedly empower citizens against arbitrary regulatory actions. Regulations issued by different regulators are likely to face legal challenges in the future on grounds of inadequate regulatory governance. Only time will tell whether such challenges would succeed. If they succeed, one would reasonably expect the respective regulators to take corrective actions to avoid more legal challenges (and the associated costs). That would indeed be the best outcome. However, research suggests, this may not be so.

Krishnan and Burman (2019) interviewed three past members of boards of Securities and Exchange Board of India, Pension Fund Regulatory and Development Authority and Competition Commission of India to understand whether statutory regulators undertake corrective exercises if their actions are struck down by courts or tribunals. The unanimous opinion was that regulators have no systematic process to analyse the decisions of courts and tribunals in order to correct defects in procedures and processes. Therefore, risk of future litigation by itself may not result in regulators improving their internal governance. Instead, deeper legislative reforms would be necessary.

Case for legislative reforms

Litigation is welcome in a democracy. It is the most potent tool in the hands of the citizenry to keep a check on the excesses by the powers that be, including the regulators. That tool is not to be blunted at any cost. But what is in question is its efficacy, delays apart, in laying down regulatory governance standards in a holistic manner by taking into consideration all aspects of regulation making.

Robust legislative reforms would be significantly better at improving Indian regulatory governance standards compared to case-law jurisprudence. A litigation at most raises few regulatory governance issues relevant to that particular case. The process takes a long time to complete, moving through the appeals process. Moreover, there could be debate on the applicability of a judgement delivered with respect to the regulations made by one regulator under one statute, to the regulations made under another statute by another regulator. This creates uncertainty in the regulatory regime. In contrast, a parliamentary legislation on regulatory governance would provide a relatively wholesome framework. Such a law could help India leapfrog to higher regulatory governance standards, instead of relying on piece-meal case-law jurisprudence to develop over decades. Between litigation and legislation, legislation is certainly a better tool to improve regulatory governance.

Proposed legislative reforms

In the Call Drop Judgment, Justice Nariman had exhorted the Indian Parliament to enact a regulatory governance law along the lines of the APA in the USA. The APA lays down standard procedures for rule making and adjudication in USA. It applies to all executive branches of the federal government and even independent agencies, subject to suitable modifications. The APA also prescribes standards for judicial review of agency actions.

In India, the Financial Sector Legislative Reforms Commission ('FSLRC') had recommended similar processes for financial regulators in 2013. These recommendations were hardcoded into the draft IFC. Based on this, the Ministry of Finance had released a handbook on regulatory governance in 2016 for voluntary adoption by the financial sector regulators. Evidently, the policy thinking on these issues is mature enough for initiating necessary legislative reforms.

Currently, India does not have a comparable statute like APA or the draft IFC. Each Indian regulator has its own unique regulatory governance standards embedded in its governing statute or in some cases, even in regulations. These standards hardly match up to the global best practices. For instance, Burman and Zaveri (2019) measured the performance of four prominent Indian regulators on a responsiveness index based on international best practices on public consultation process. None of the regulators scored more than 5 out of 10. The situation is likely to be worse in government ministries and departments, since their processes are based more on custom and lack any statutory backing. This creates a situation where not only regulators are following different statutory standards, but government ministries and departments are functioning without any statutory standards at all.

India needs an overarching regulatory governance statute along the lines of APA and draft IFC, applicable to all regulators and government departments. This law should have two broad elements. First, it should lay down standard processes for framing rules and regulations, conducting affairs of the regulatory board, annual reporting, approval for regulated activities, investigation and adjudication. For regulation-making, the minimum standards of public consultation, where feasible, and CBA must be embedded in the statute. While developing such CBA standards, policymakers must ensure adequate flexibility to regulators so that a CBA need not necessarily be quantitative and could also be purely forward looking in nature. Second, the law should lay down precise standards for judicial review of actions taken by government departments and regulators under the law. Judicial review should be restricted to ensure that minimum standards of regulatory governance are complied with. Overall, such a law would enhance regulatory governance and improve predictability.

Conclusion

Since the liberalisation of 1990s, the optimism about specialised regulators has been replaced with concerns about regulatory governance in these institutions. Judicial precedents such as the Crypto Judgement and Call Drop Judgement help address these concerns to some extent. However, the risk of future litigation by itself may not nudge regulators to improve their internal governance. Instead, deeper legislative reform along the lines of APA in the USA and the draft IFC in India, is necessary. Policymakers would do well to heed Justice Nariman’s advice. The good news is, the FSLRC suggested IFC has the draft for consideration.

References

Burman and Zaveri, Measuring regulatory responsiveness in India: A framework for empirical assessment, William & Mary Policy Review (2019).

Krishnan and Burman, Statutory regulatory authorities: Evolution and impact, in Kapur and Khosla, Regulation in India: Design, Capacity and Performance (2019).

Roy, Shah, Srikrishna, Sundaresan, Building state capacity for regulation in India, in Kapur and Khosla, Regulation in India: Design, Capacity and Performance (2019).

 

Pratik Datta is a Senior Research Fellow and Varun Marwah is a Research Fellow, at Shardul Amarchand Mangaldas & Co. We thank Mr. Shardul S. Shroff, Mr. Sudarshan Sen, Mr. Prashant Saran, Mr. Gopalkrishna S. Hegde and two anonymous referees for useful comments. All views expressed are personal.

The economics of releasing the V-band and E-band spectrum in India

by Sudipto Banerjee, Mayank Mishra and Suyash Rai.

Internet usage in India has witnessed an enormous growth in last few years. The wireless data usage in 2017 has increased from 20,092 million GB per year from 828 million GB per year in 2014, showing a growth of more than 24 times. This increasing use of data is causing congestion in the existing bands which finally affects the quality of services provided to consumers. In order to cater to this surge in data consumption, it is essential that there should be a commensurate increase in supply of broadband internet. Perhaps the approach to the supply also needs to change. Availability of additional spectrum is an important piece of this puzzle. V-band (57 GHz - 64 GHz) and E-band (71-76 GHz and 81-86 GHz) are two microwave bands which can be useful for bridging this need for additional spectrum. Spectrum in these bands can be used for high capacity data transmissions for last mile connectivity over short distances ranging from 200 metres to 3 km. These bands can be put to a variety of backhaul (i.e. for connecting towers). V-band can also be used for access under the Wi-Gig standards.

It has recently been reported that the Department of Telecommunications is weighing administrative allocation as the method for releasing the spectrum in the E-band and V-band, and it will take the Attorney General's opinion in this regard. This legal opinion is considered necessary because of the Supreme Court's judgment in the 2G case. The allegations of irregularity in 2G spectrum allocation led to judicial scrutiny of the method of allocation and also much public discussion. The Supreme Court quashed several spectrum licenses granted due to irregularities in the manner of allocation of spectrum to licensees on first-come-first-served basis.

After a Presidential reference, the Supreme Court had clarified that it is the prerogative of the Government to decide the methodology of alienation of other public resources, provided the method is transparent, fair and backed by social or welfare purpose. The Court also stated that revenue maximisation need not be the sole objective while alienating public resources and in fact this is subservient to the goal of serving common good of the society. Therefore, as the Government decides to release this presently unreleased spectrum, it should consider the overall economic impacts of the alternative strategies for releasing the spectrum. On this issue, we recently published a Working Paper that provides an overview of the uses of V-band and E-band spectrum, and how we may think about choosing a suitable method for releasing this spectrum. This blogpost gives an overview of the paper.

Licensing approaches

There can be four main approaches to releasing the spectrum. First, Individual authorisation with individual licensing is the conventional link-by-link allocation involving individual frequency planning/coordination. In this method, the allocation of spectrum is usually done using traditional procedures for issuing licenses, which involves a selection process by the administration. Sometimes, the administration delegates this task to the operators, but it keeps control of the national and cross-border interference situation. Second, individual authorisation with light licensing is also a method of giving exclusive usage authorisation to certain service providers for a period of time, but the method of licensing is simpler, and may involve 'first come first served' procedures. In this method, allocating authority typically places a limitation on the number of users in a given area.

Third, general authorisation with light licensing is a combination of license-exempt use and some degree of protection of users of spectrum. There is no individual frequency coordination, but the user is required to notify the authorities with the position and characteristics of the links. The database of installed stations containing appropriate technical parameters is publicly available. Importantly, in this method, there is no limitation on the number of users. Fourth, the license exempt method offers the most flexible and low cost usage of spectrum. It does not require even notification or registration, and does not mandate any individual frequency coordination. This method has worked well in specific bands (e.g. 2.4 and 5.8 GHz used for Wi-Fi access) where short range devices are allocated, but fixed service applications may also be accommodated. Although this does not guarantee any interference protection by the regulator, alternate interference management techniques are available to deal with the issue. In addition to these approaches, there are block assignment regimes, where assignment is made through renewable licensing or through permanent public auctions, or through other allocation mechanisms.

Although auction is often assumed to be the most suitable method for allocating spectrum, studies on unlicensed spectrum suggest that such availability of spectrum can also lead to significant benefits for the economy, many of which seem to be arising out of unpredictable uses, which may not have occurred if the spectrum had been auctioned. One interesting example is the use of RFID in clothing sector. According to a study done in 2014, this use generated about USD 100 billion of annual benefits for the US economy. Arguably, if the usage of this spectrum had been restricted, this usage would not have scaled up in such manner. It is important to understand that absence of auction is not the same as giving arbitrary benefits to hand-picked service providers. If the regime is open and transparent, the spectrum can be made available for use by a variety of potential service providers and users without giving unfair advantage to anyone in particular.

Most countries acknowledge that certain spectrum bands are best left unlicensed, or may be subjected to a "light touch" licensing regime, with minimal regulation. In India also, a number of spectrum bands are unlicensed, like 2.4 GHz and 5.8 GHz spectrum bands used for Wi-Fi access; 865 MHz - 867 MHz band used by RFID devices; 402 MHz - 405 MHz spectrum band used for medical wireless devices; and so on. A number of countries have adopted license free frameworks for adopting the V-band, including USA, UK, Switzerland, Japan, Korea, China, Canada, Malaysia and Philippines. Although international experience is useful, we also need to consider Indian context, and how this spectrum may be put to use in this context. In the paper, we consider the various potential uses of this spectrum, and attempt to quantify the scale of this usage in an optimal scenario.

The potential uses of V-band and E-band in India

The context of broadband Internet in India will determine the kinds of benefits that India can get from V-band and E-band. There are certain key aspects of this context. First, in India, most users access broadband internet through wireless networks. However, wireless broadband networks has certain limitations. In densely populated areas, as more people get on to wireless broadband, the mobile spectrum bands may get congested. This necessitates more cell sites and higher backhaul speeds. Compared to wired connections, especially fiber optic connections, mobile broadband provides lower speeds and less consistent connectivity. Further, a low density of wired connections constrains the potential of developing community hotspots, where residential or business short-range networks are made available for use by other users of the network. Globally, the proliferation of such hotspots is one of the most remarkable stories in the growth of Internet in recent years. Such hotspots provide high speed, consistent connectivity, while offloading from mobile networks - a benefit that India will not be able to realise without proliferation of fixed broadband connections.

Second, a negligible percentage of the fixed broadband connections are fibre optic-based. Most of the wired connections use DSL, Dial-up, or Ethernet, all of which offer potentially lower speeds than fibre optic. This situation is very different from what is seen in developed countries, and also in comparable developing countries. Third, India has a low density of commercial Wi-Fi hotspots. Such hotspots can help augment the mobile broadband and private residential and commercial hotspots as well as mobile broadband. Use of public Wi-Fi can help offer consistent, reliable and high speed Internet to users, while decongesting mobile broadband. India has only about 36,270 public Wi-Fi hotspots. The total number of public Wi-Fi hotspots in the world is over 12 million.

In the coming years, the main challenges for internet access in India are likely to be round consistency and quality of access. To address these challenges, the intermediate policy goals for broadband Internet India should be: expanding access to fixed broadband; decongestion of mobile broadband in dense urban environments; and proliferating Wi-Fi hotspots. Achieving these intermediate goals would help improve quality and consistency of internet access in India. This will not happen automatically, and requires policy focus, which may begin with rethinking spectrum allocation methods for these spectrum bands.

In the paper, we have identified the following key uses of the V-band and E-band spectrum, and tried to quantify the scale of these uses:

• Support proliferation of commercial Wi-Fi and Wi-Gig hotspots: these bands can help backhaul the commercial Wi-Fi infrastructure in a cheaper and quicker manner, especially in dense urban locations. These bands can also promote the proliferation of Wi-Gig hotspots. Wi-Gig networks use V-band which provides wider channels than standard Wi-Fi, resulting in significantly faster data speeds.
• Support expansion of fixed broadband Internet in urban areas: these bands can help solve the last mile problems of getting high speed wired broadband Internet into dense urban locations.
• Backhaul for mobile broadband: these bands can provide higher capacity backhaul for mobile broadband, thereby easing congestion.
• Other uses: these bands can be put to a variety of other uses. These, inter alia, include: extension of local area networks between buildings within a building complex; Internet of Things (IoT); Vehicle to vehicle communication and Augmented Reality (AR)/Virtual Reality (VR) Systems among others.

Given India context of high urban population density, and many urban areas with old and dense construction, the scale of usage of these spectrum bands is likely to be quite high. We tentatively find that if these spectrum bands are allowed to be used optimally, they could lead to improved speed of internet, increased consistency in internet access, and greater volume of internet usage. However, there are many potential uses of this spectrum that are difficult to predict at present. For instance, the potential for IoT is very difficult to predict at the moment, albeit a lot is being said about how far IoT can go. These are early days for the adoption of this spectrum and the allocation method should take into account this uncertainty about the potential uses.

Mapping the economic benefits arising from the uses

In choosing a method for releasing this spectrum, the focus should be on maximising the net benefit for the society as a whole. Given the paucity of relevant data and earlier studies, we are unable to reasonably monetise the economic value of these benefits. However, we attempt to map the types of uses with various types of economic benefits that may accrue from them.

If the V-band and E-band spectrum is delicensed or lightly licensed, the pass-through cost of this spectrum will be zero or very small, and only substantial cost will be installation costs. In a competitive market, ceteris paribus, reduction in costs will lead to lower prices for consumers. Given the price elasticity of demand for internet, and the rapid evolution of technology, this availability will lead to higher usage of broadband internet by consumers, allow new consumers to use broadband internet and enable innovative business models and technologies.

The use of these spectrum bands will lead to a reduction in costs and create opportunity to reach hitherto unreachable locations in dense urban environments with high speed Internet. This will lead to a shift in the supply curve, so that more quantity is made available at a given price. If the quality of Internet access improves, as is expected from the use of V-band and E-band, there may also be a shift in the demand curve, as users may be willing to pay more for the connection. Quality improvement also has larger economic benefits. For instance, if the speed of Internet usage increases, users will be able to put their connections to a wider variety of uses, especially in commercial contexts.

Following are the key economic benefits expected to arise from the uses of V-band and E-band spectrum. It should be noted that all these benefits cannot be fully attributed to these spectrum bands. Some of them, such as benefits from Wi-Gig devices, may be fully attributed to these spectrum bands, because they rely completely on the availability of this spectrum. Other benefits can be partially attributed to these bands.

• Producer surplus due to offloading from mobile broadband: Producer surplus usually increases if the cost somehow falls without change in price charged. It can also increase if the price increases without corresponding increase in costs. The use of these spectrum bands would enable offloading from mobile broadband which will generate producer surplus.
• Producer surplus from lower backhaul costs for mobile broadband: Lower backhaul costs could lead to producer surplus for mobile broadband service providers. This can be calculated by comparing the costs of backhaul using V-band and E-band with the cost of establishing infrastructure for a similar quality of service using other backhaul solutions, such as fibre optic cables. Most of this surplus would arise in congested areas.
• Consumer surplus from use of commercial Wi-Fi hotspots and fixed broadband: Consumer surplus is the benefit that consumer derive from use of a service or good. A variety of sources for consumer surplus can be identified on the basis of the uses of V-band and E-band presented in the previous section: consumer surplus from commercial Wi-Fi in dense locations; consumer surplus from free Internet given by Wi-Fi hotspot providers; consumer surplus from greater use of Wi-Fi and Wi-Gig devices; consumer surplus from indoor use of fixed broadband.
• GDP contributions: In addition to consumer surplus and producer surplus, there are also GDP contributions that may arise from the use of this spectrum. These are mostly in terms of new or improved businesses and technologies that are enabled by this spectrum band, such as usage of commercial Wi-Fi and Wi-Gig hotspots, higher speed of internet, Wi-Fi and Wi-Gig device sales, new or modified businesses and technologies (eg. IoT).

Since most of these benefits will accrue to consumers and producers, this will also create potential for the Government to extract part of this benefit as additional tax collection. For instance, sale of devices and provision of services will create opportunities for the Government to collect taxes from these activities. Further, to the extent that these activities will lead to additional profits for service providers, part of that profit will be taxed by the Government. The concern that the Government may lose out on some non-tax revenue if it chooses to delicense this spectrum may be overcome by these revenue opportunities. Further, in light licensing regimes, some fees may also be levied on the usage of the band. However, as discussed earlier, keeping the fees high may impede usage of these bands, and may discourage some types of usage that may generate significant economic benefits. The experience of Wi-Fi and RFID spectrum supports this contention.

Conclusion

In conclusion, four key takeaways emerge from this analysis. First, while choosing a method for releasing this spectrum, the focus should be on ensuring maximum aggregate benefits for the society, and not short-term revenue maximisation for the Government. Among other things, this means that the potential of these bands to help improve India's overall system of broadband Internet access should be realised. Some of the major limitations in the present system could be partially overcome by use of these spectrum bands, along with other suitable policy measures.

Second, although the economic benefits of these spectrum bands are likely to be substantial, studies on economic benefits of previously unlicensed spectrum bands suggest that the variety and scale of economic benefits may increase over a period of time if easy access to spectrum is enabled. As has happened with other unlicensed spectrum bands, innovation and competition may lead to many types of uses that are difficult to anticipate at present. Hence, it would make sense to liberalise the spectrum without any cumbersome procedures or high fees.

Third, many of the benefits are not realised by the service providers, and accrue in terms of consumer surplus and GDP contributions of businesses and technological innovations spurred by the availability of this spectrum. If the Government decides to target revenue maximisation while allocating the spectrum, it will mainly be able to extract part of the producer surplus. However, this will have effect on proliferation and therefore, on consumer surplus and GDP contributions. This may lead to significantly lower economic benefits of the spectrum for the economy as a whole. So, it may be better to not allocate this spectrum based on methods of individual authorisation. Instead, general authorisation with light licensing or license-exempt approaches may be explored. These approaches also allow the government to extract part of the economic benefits later, especially in the form of taxes.

Fourth, in thinking about the strategy to release the spectrum, it is important to align with global device ecosystems and standards, so that India can benefit from economies of scale in production of devices, and potentially become a manufacturing hub for the devices.

 

The authors are researchers at the National Institute of Public Finance and Policy.

Cost of compliance for clinical establishments

by Manya Nayar and Shubho Roy.

The Clinical Establishments (Registration and Regulation) Act, 2010 (Clinical Establishments Act) is facing resistance from the medical fraternity. The Indian Medical Association claims that the law will cause an increase in the cost of treatment and adversely affect small and medium size clinical establishments such as a clinic run by one or a few doctors. The Health Minister for Delhi promised that the law, as drafted by the Planning Commission, will not be implemented in Delhi. On 27th April, 2017, doctors observed `black day', to protest against the law.

Costs and benefits in a sound regulatory process

All regulation creates constraints for private persons. In general, the constrained cost minimisation of private persons will yield an inferior value (i.e. higher cost) when compared with the unconstrained cost minimisation. The question that society must ask is about the extent to which the regulation yields benefits that outweigh the costs.

In a sound regulatory process, this step is built into the regulatory process through administrative law. It is called Regulatory Impact Analysis (RIA) or Cost Benefit Analysis (CBA). The formal process of undertaking RIA/CBA is a healthy one for three reasons:

1. The process of undertaking the CBA helps policy makers improve thinking about the problem that we seek to solve and the alternative mechanisms that could be adopted.
   
2. The citizenry obtains greater transparency when the CBA is released. Officials get an opportunity to display expertise in the release of the documents. Transparency and expertise create legitimacy.
   
3. The public, and all interested parties, are able to modify assumptions and rework the thought process of the regulator. This creates a more informed public debate.

As an example of doing cost-benefit analysis, consider the way the the British Government proposed a regulation requiring clinics to check the English language skills of doctors before he/she is appointed in a clinic. The cost-benefit analysis weighs the costs and benefits of various policy option including the option to do nothing. On the side of costs, the government estimated that 15% of the doctors will be required to take the test, which would cost GBP 132 per test. On the side of benefits, it was estimated that over a period of 10 years, English competence, would prevent:

1 death, 2 cases of severe harm and 15 cases of moderate harm...

The quality adjusted life year was valued at GBP 60,000. The litigation costs arising out of the injuries from poor English knowledge of doctors was estimated to be half of that. These would be savings to society: clinics and patients. The analysis concluded that the costs would be around GBP 0.77 million while total benefits would be GBP 2.01 million (on a net present value basis). As the estimated benefits outweigh the cost, the proposed regulation is justified.

Turning to the Indian context, while the protesters are arguing about the increased costs of treatment under the proposed law, estimates about the financial implications for providers are lacking. Like the Clinical Establishments Act, the Right to Education (RTE) Act also focuses on the provision of inputs and not on outcomes. Most of the requirements under the RTE act impose costs on schools without any demonstration on improved learning outcomes. Wadhwa (2010) shows that learning outcomes are not correlated with the school infrastructure, which forms majority of the measures required under the RTE Act. Wadhwa's research shows that the most significant factor for learning outcomes is teacher attendance. Sadly, this is not part of the RTE Act measures. On the other hand there is research to show that complying with the RTE Act, substantially increases the cost of school fees. Centre for Civil Society calculated the compliance cost of RTE in Delhi. They found that due to RTE norms, the average cost per child will go up to INR 2,223 per month from the current fee of INR 322 per month, indicating an increase in average fee by 590%. While some the RTE Act requirements like the need for a 800 sq.m. playgrounds have been relaxed to 200 sq m most of the other input based requirements remain. Muralidharan and Sundararaman (2009) carried out a randomised control trial in five districts of Andhra Pradesh with 500 schools over two years. Teachers were offered a bonus for gain in standardised scores. The authors conclude that teacher performance pay led to significant improvements in student test scores. The results also showed positive spillovers i.e. students further more performed better in subjects for which teachers were not given incentives. However, such measures are yet to be incorporated into the RTE law.

In this article, we estimate the cost of setting up a basic doctor's clinic which complies with the standards under the Clinical Establishments Act.

The standard

The Clinical Establishments Act prescribes standards for health care facilities. It covers pharmacies, dispensaries, clinics, diagnostic centres, and hospitals of various types and sizes. Standards have been made for different types of clinical establishments. The most basic type of clinical establishment under the Act is: Clinics (only consultation). This type covers a simple doctor's clinic. A doctor's clinic is usually the first, and most frequent, point of contact between doctors and patients. While these locations are limited to an interaction with a doctor, a few minor procedures like dressing, administering injections, etc. may be provided. No overnight stay or observation can be carried out in these clinics. The standards for this type of clinic constitute the smallest possible compliance cost under the law. We studied this standards document, Clinical Establishments Act Standard for Clinic/Polyclinic only Consultation, in order to estimate the cost of compliance.

Methodology

1. We identified the requirements from the standards document.
   
2. Made certain assumptions, like location of clinic, consumption of medicines, registration costs, etc.
   
3. Obtained prices of the items required.
   
4. Estimated the annual compliance cost.
   
5. Drew up three scenarios based on assumptions about number of patients visiting each day.
   
6. Estimated the compliance cost per patient.

Identifying requirements:

The standards document groups the requirements into seven categories:

1. Infrastructure: Lays down the minimum floor area for the clinic.
   
2. Furniture/fixtures: Mandates that the clinic have cupboards, tables, observation tables, etc.
   
3. Human resource: Requires that the clinic have at least one support staff person.
   
4. Equipment/instruments: Lists out the medical equipment that a clinic should have.
   
5. Medicines: Requires the clinic to maintain inventor of 13 essential medicines.
   
6. Legal/statutory requirements: Requires the doctor to be registered with the state medical council, the clinic be registered under the Clinical Establishments Act, and comply with environmental laws for disposing biomedical waste.
   
7. Record Keeping: The clinic must keep records of all patients for 3 or 5 years.

Assumptions:

We made the following assumptions:

• Location: The clinic is located in Saket, New Delhi.
  
• Number of working days: The clinic is open for 26 days in a month.
  
• Resuscitation equipment: The phrase resuscitation equipment in the standard is ambiguous. We assume that the requirements for hospitals would also apply to clinics.


• Classifying medicines: We divided the list of medicines into emergency and non-emergency using Indian Public Health Standards: Guidelines for Community Health Centres.
  
• Consumption rate of medicines: We assume that emergency medicines are consumed at the rate of 5 per month and non-emergency medicines, at the rate of 26 per month. These values were chosen through discussions with doctors.
  
• Registration cost: The registration cost under the Clinical Establishments Act is assumed to be Rs.1000, which is generally the case.

Sources of price data: We found furniture and equipment prices from Amazon.in and Industrybuying.com. Rental charges were estimated using Magicbricks.com. The salary of the helper was estimated using Naukri.com. Prices of medicines were obtained from Medindia, MedPlus Mart and Indiamart.

Exclusions: Our estimates are conservative in that the following are not counted:

• Doctor's profit/income
  
• Cost of keeping medical records
  
• Water charges
  
• Cost of board/signage
  
• Compliance cost under bio-medical waste management laws

Number of users. The compliance costs will be distributed amongst the patients visiting the clinic. This requires assumptions about traffic at the clinic expressed in patients per day. We considered three scenarios: Optimistic (45/day), Realistic (30/day) and Pessimistic (15/day).

Findings

The calculations were made using a spreadsheet that is released to the public.

Table 1 reports the total cost for setting up and running the clinic for two years, and the costs per patient based on our scenarios. In Table 2, we broke the cost down into sub-components to see which part accounts for the largest share.

Table 1: Compliance cost and cost per patient

Expenditure/Scenarios	Year One	Year Two
Compliance cost:
Capital Expenditure	95,114	27,324
Revenue Expenditure	4,29,640	4,29,640
Total Expenditure (Sum of capital and revenue)	5,24,754	4,56,964
Cost per patient:
Pessimistic   (15 patients/day)	112	98
Realistic   (30 patients/day)	56	49
Optimistic   (45 patients/day)	37	33
	Values are in Rs.

This suggests that the standard may impose a cost of around Rs.50 per patient, under the `Realistic' case. These are significant values when compared with the typical charges at clinics in Delhi.

Table 2: Components of expenditure

Head	Year One	Year Two
Infrastructure	39.5	45.4
Furniture	6.2	0.6
Human resource	19.4	22.3
Equipment	11.8	5.4
Drugs	22.6	26.0
Legal requirements	0.5	0.3
	Values are in Percentage of total.

This shows that the cost structure is dominated by what the standard requires in the form of infrastructure.

Our work is incomplete

We have only estimated the costs of the standards. We have no idea of the benefits arising out of these standards. No studies or estimates about either benefits or costs were released by the government as part of the process of drafting the standards. We know that infrastructure costs are important, but we do not know if the size of the waiting room affects the quality of medical care. This requires much more research about the benefits each requirement, like a 35 sq.ft. waiting room, bring to the table.

Conclusion

Regulations impose costs. Costs are passed on to users. When the benefits to users are more than the costs, the regulations may be beneficial. It is not clear that the standards for basic clinics satisfy this criterion. There are no estimates about the benefits that flow from the standards. It is not clear that mandatory staff or minimum waiting area help induce a positive outcome for patients.

Regulations under the Clinical Establishments Act will have consequences on the price of health care in India. In India, an increase in prices of a few per cent can impact upon millions of users. People excluded from trained medical care may use quacks as a substitute. Such substitutions may have negative effects on health outcomes. More work needs to be done before imposing requirements on regulated entities. The government should carry out research and analysis to be satisfied that each word of each law/standard is justified and the benefits outweigh the costs.

References

Centre for Civil Society, Effectiveness of School Input Norms under the Right to Education Act, 2009, 2015, Centre for Civil Society.

Misra, Kartik and Bapna, Akanksha and Shah, Parth J.,The cost to comply with the Right to Education Act, 2012 (on file with authors).

Muralidharan, Karthik and Venkatesh Sundararaman, Teacher Performance Pay: Experimental Evidence From India.(2009) NBER Working Paper Series 15323.

Narang, Prashant, Right to Education as Another License Raj: Punjab as a case study, 2014, Centre for Civil Society.

Wadhwa, Wilima, RTE norms and learning outcomes, 2010, ASER.

Regulatory Policy in India: Moving towards regulatory governance

by Lalita Som.

Regulatory policy, a comparatively young discipline, is evolving in different ways across the world, reflecting the diverse range of legal, political and cultural contexts on which countries have built their public governance. Regulation, one of the key levers of state power, is of critical importance in managing the economy, in sequencing business behaviour, implementing social policy and influencing behaviour. Regulatory policy thus helps to shape the relationship between the State, citizens and businesses.

In OECD countries, policies to increase competition in markets, and to "roll back the frontiers of the state" in the 1980s and 1990s, broadened to become regulatory reform. Regulatory reform became an essential adjunct to structural reforms, reaching out beyond the network sectors to encompass product market reforms and the liberalisation of professional services. Independent regulatory agencies were developed to manage key aspects of economies and society at an arm's length from the political process. This became known as the regulatory state. The regulatory state paved the way for the idea of regulatory governance (OECD, 2010a).

In OECD countries. regulatory policy has made a significant contribution to economic growth and societal well-being - through its contribution to structural reforms, liberalisation of product markets, international market openness, and a less-constricted business environment for innovation and entrepreneurship. Regulatory policy has supported the rule of law through initiatives to simplify the law and improve access to it, as well as improvements to appeal systems. Increasingly, it has supported quality of life and social cohesion, through enhanced transparency which seeks out the views of the regulated, and programmes to reduce red tape for citizens.

Many OECD countries are concerned about distributional equity – to maximise the welfare of the most disadvantaged, paying attention to distributional consequence of policy actions, albeit not beyond the point at which they would impede on overall prosperity. These insights have had a strong practical influence on approaches to the impact assessment of regulations and especially, analysis of costs and benefits, including distributional aspects and under conditions of uncertainty (OECD, 2010a).

Regulatory reform can be viewed strategically, in both developed as well as emerging markets, as one of the core instruments at the disposal of policy makers. The modern State will have to utilise its regulatory power wisely if it expects to be smarter in order to face challenges like the growing fiscal burden for providing key public services such as health, education and social insurance schemes, in establishing governance arrangements and rationalising complexities to manage the consequences of decentralisation, in supporting the investment climate and in reducing the state's role as an active investor in the economy.

In fulfilling these objectives in an effective way the overall framework of the formulation of laws and regulations requires an explicit whole-of-government approach for regulatory policy, including: responsibility for co-ordination and oversight of regulatory policy; a commitment to assess the cost-benefit of new regulatory proposals and existing regulations, and; the effective implementation of the principles of transparency and public consultation in regulatory decision making (OECD, 2010a).

In emerging markets, extensive state ownership and interference have led to regulatory uncertainty and a business climate that is not conducive to fair competition in open markets. The state's dual role as an active investor and referee has meant that the government is uniquely positioned to shape the applicable legal regime with its interests as shareholder in mind. In many cases, state ownership has created conflicts of interest for the authorities and distorted or suppressed competition. Regulatory institutions and processes are still young in emerging markets, and often regulatory authority is fragmented across a number of bodies, some of which have conflicting mandates. Inadequate co-ordination among government bodies at the national and sub-national levels is a widespread problem, leading to unclear, duplicative, and often conflicting efforts in a number of areas. The lack of sound regulatory governance has meant that popular perceptions of endemic patrimonial politics have persisted, with vested interests and collusion being assumed to operate at the expense of the national interest.

A recent OECD Regulatory Policy Working Paper, Regulatory Policy in India: Moving towards regulatory governance, looks at India’s existing regulatory regime and its evolution in the last two and half decades. The mechanisms of regulatory governance have weaknesses, and in some cases have fallen short of expectations. The paper looks at India's uneven regulatory environment and how its legacy features constrain the evolution of regulatory governance.

Foremost is the difficulty in designing and implementing regulatory policies given the government's inclination to maximize its revenue at the expense of social welfare. This trade-off has compromised effective regulation in the country because of a lack of understanding of what constitutes the objectives of regulatory governance. The paper highlights how the dichotomy between the interests of governments and businesses, as well as that of citizens, has manifested itself over the years in four distinct sectors i.e. mining, hydrocarbons, power and telecoms.

Basic regulation in India is implemented via the concerned line ministries, which may proceed to create industry-specific regulatory authorities that have varying degrees of autonomy, functions, and power. There are significant variations in the structure of the governing bodies, tenure of the members, sources of finances, and interface with the government. A noticeable feature of many of the regulators in India is that they are charged with the promotion and development as well as the regulation of a certain industry. That can result in the regulator thinking of the interests of the industry rather than the users of the industry.

In sectors like insurance, coal, petroleum, telecoms, banking, regulatory strategies are hampered by the presence of State owned firms. The inadequate institutional distance between regulators and state-owned firms, especially when there are no firewalls between them, has meant that the regulators have not promoted enough competition.

In these areas, the State is obliged to play a dual role: i.e. that of market regulator when it is also the owner of commercial SOEs, particularly in newly deregulated, often partially privatised industries. Whenever this happens, the State is inevitably conflicted in its opposing interests as: first, a major market player/firm owner in its own right, and second, as an arbitrator in the (supposedly) neutral, impartial, dispassionate role of regulator.

Regulators are expected to behave independently, and the challenge of independence is to avoid capture by interest groups who stand to benefit from regulation. It is equally significant to avoid regulatory capture by local politicians. Local politicians are attracted by the possibility of large economic rents in perpetuity. Too often, regulators have actively internalised political sentiments in their decision-making. In addition, the elite governmental bureaucracy has a ubiquitous presence in regulatory bodies. Regulatory independence from the executive is difficult to administer if regulators themselves come from a career backdrop of directing political decisions. This strain is exacerbated when regulators are appointed directly from senior governmental positions, requiring them to shift, from administering and defending government positions, to acting as an impartial referee (Dubash, 2008).

Many areas, such as agricultural markets, warehousing, or land, require coordinated approaches to regulation (both rule-making and enforcement) by the central government, and sub-national governments at the state and city levels. Economic liberalisation, coming on the heels of political federalisation, has transformed federal –state relations unleashing unintended and unplanned decentralisation (Sinha, 2004). Any regulatory reform agenda depends crucially on a close co-operation between different levels of government. Federal-state relations have been affected significantly with the rise of multi- party coalition governments and alliance politics in the 1990s. Coalition and alliance partners from states have become progressively more powerful at the national level and more capable of bargaining with the national government. That political reality has added considerable complexity to the environmental and social dimensions of economic decision-making which need the cooperation, and an explicit ethos for regulatory governance, of both national and state governments. The need for multi-level policy coordination has been felt making way for the creation of technical and regulatory agencies at various levels, at times adding to the complexity of policy processes, at others to the bypassing of traditional forms of accountability at all levels (Arora, 2014).

In addition to the legacy features of India’s regulatory environment, the country lacks a coherent policy on regulation. A whole of government policy towards "regulating" would provide the connectivity of different reform efforts and help the concerted effort towards regulatory governance instead of disconnected regulatory reforms. This may include a combination of creating or enabling institutions to embed good regulatory principles into their functioning, but also include the systemic implementation of good regulatory practices such as regulatory impact assessments, public consultation and administrative simplification in priority sectors.

Some sub-national regulators in the power sector and the airports regulator have embedded stakeholder engagement with discernible positive outcomes. the more active use of Regulatory Impact Assessment (RIA) and stakeholder consultation, can inform the government on the cost of some of the trade-offs that India faces in the design of its regulatory policy. Although there exists a certain consensus on the importance of RIA and half-hearted efforts have been made so far to implement it, lack of political will, capacity constraints and limited awareness amongst other stakeholders are impeding its further application. Experience with regulatory governance in the last two decades has resulted in the Regulatory Reform Bill 2013 which intends to legislate an overarching regulatory law to introduce further regulatory reforms and standardise some basic institutional features and processes across all regulatory bodies. The OECD would welcome the opportunity to engage with the NITI Aayog during the redrafting process of this bill.

In addition, India could learn from the experience of both mature and young regulatory governance countries in implementing its regulatory policies. Malaysia which has undertaken large market reforms leading to initiatives for greater regulatory coherence. Australia and New Zealand’s Productivity Commissions, show, most importantly, that the regulatory environment needs to be constantly evaluated to make sure it is keeping pace with the changing technology, business environment, and consumer needs and demands (OECD 2010b). The United Kingdom’s Regulatory Policy Committee provides opinions and scrutiny over the quality of analysis by government departments and are engaged in setting "regulatory guidance" across the government. Korea's Regulatory Reform Committee drives forward the regulatory reform agenda (OECD, 2015).

Bibliography

OECD (2010a). 'Regulatory Policy and the Road to Sustainable Growth', OECD Publishing, Paris.

Dubash, Navroz (2008). 'Institutional Transplant as Political Opportunity: E-Practice and Politics of Indian Electricity Regulation', Comparative Research in Law & Political Economy Research Paper No. 31/2008.

Sinha, Aseema (2004). 'The Changing Political Economy of Federalism in India: A Historical Institutionalist Approach', India Review, Vol. 3, No.1.

Arora, Dolly (2014). 'Trends in Centre-State relations', Indian Institute of Public Administration, New Delhi.

OECD (2010b). 'Review of Regulatory Reform: Australia', OECD Publishing, Paris.

OECD (2015). 'Regulatory Policy Outlook', OECD Publishing, Paris.

 

Lalita Som has worked for the Organisation of Economic Cooperation and Development, Paris. She can be reached at lalita.som@gmail.com

A critique of RBI's proposal to regulate pre-paid payment instruments in India

by Chetna Batra, Gausia Shaikh and Bhargavi Zaveri.

Demonetisation has reportedly given a fillip to the use of digital pre-paid payment instruments (PPIs) in India. PPIs are stores of value which can be used for the purchase of goods and services. Some PPIs are akin to zero-interest deposits as they allow users to withdraw the money lying in their PPI accounts at any time. Since a bank account can do everything that a wallet can plus earn the consumer some interest, keeping money in a PPI has costs for consumers. However, owing to the demonetisation decision, PPIs' early tie-ups with vendors, the slow penetration of the Unified Payments Interface and a smooth phone-enabled interface, PPIs have seen significant growth over the last few months. Table 1 shows the growth in the usage of PPIs during the three months pre and post demonetisation.

Table 1: M-o-M growth of usage of PPIs in India
Time-period	August 2016-October 2016	November 2016-January 2017
Transaction value	2.1%	30%
Transaction volume	9.6%	20.5%
Source: Reserve Bank of India

Until now, the issuers of PPIs were regulated by RBI as payment system providers under the Payment and Settlement Systems Act, 2007 (PSS Act) and delegated legislation issued by RBI under it. On March 20, 2017, the RBI published a draft Master Direction (DMD), announcing a revised regulatory framework governing the issuance and operation of PPIs in India.

Our analysis shows that the framework proposed in the DMD is out of tune with the broader public discourse and RBI's own objective of moving towards a less-cash economy. It perpetuates bank dominance in the payments eco-system and imposes entry barriers disproportionate to the risks that a PPI business entails. It attempts to protect consumer interests by over-prescribing operational requirements. However, in doing so, it destroys the efficiencies of transacting digitally. More importantly, it defeats the objective of financial inclusion that easy digital platforms were supposed to underpin. It prescribes a new licensing framework that is vague and vests excessive discretion in the hands of the regulator, leading to potential rule of law problems of the kind seen previously in the payments eco-system. We, at the Finance Research Group at IGIDR, submitted written comments on the DMD. The key points of our critique are summarised in this article.

Lack of competitive neutrality

Payment services are different from banking. The former is about clearing and settlement, the latter about accepting deposits and lending (Shah (2016)). World over, payment eco-systems were conventionally dominated by banks. Several jurisdictions have, a while ago, disintermediated payments from banking by mandating an equal playing field between banks and non-bank payment service providers (Watal Committee Report (2016)). The DMD, however, perpetuates the approach of differentiating between banks and non-banks, by allowing the former several advantages over the latter. For instance:

1. Product design: Bank PPI issuers are allowed to issue open-system PPIs, which can be virtually used as debit cards (including for withdrawing money). Non-bank PPI issuers are, however, not so allowed. Jurisdictions such as the UK, USA and South Korea, do not segregate or limit the purposes for which a consumer may use her PPI account. As long as an entity fulfills the uniform eligibility criteria prescribed by the regulator, the product design is left to the PPI issuer.
2. Deployment of funds: Non-bank PPI issuers are required to lock the entire amount deposited with them by PPI account users, in an escrow account with a commercial bank. On the other hand, bank PPI-issuers are not subjected to this requirement and they may lend the money deposited with them by consumers. Thus, while non-bank PPI issuers are subjected to a virtually 100% cash reserve ratio requirement, despite not undertaking lending activity, bank PPI-issuers are allowed to lend the consumers' deposits after accounting for a cash reserve ratio of 4%. Given that both bank and non-banks issuing PPIs undertake the same kind of liabilities to the consumers of their PPIs, and that non-bank PPIs do not lend the deposits made with them, subjecting bank and non-bank PPI issuers to differential cash ratio requirements is discriminatory.
3. Cross border payments: Non-bank PPI issuers are not allowed to undertake full-fledged cross-border payments, which most bank PPI issuers will be able to undertake under their authorised dealership licence.
4. Access to RTGS, NEFT and IMPS: Currently, all payment service providers are not granted access to the central bank's payment systems. Contrast this with clearing corporations in the securities markets, which do not distinguish between applicants for clearing membership, as long as they meet margin requirements. Granting access to payment system providers to the central bank's payments systems would permit them to function seamlessly and innovate to develop cheaper products.

The DMD also discriminates between existing players and new entrants by allowing existing PPI issuers three years to meet the new minimum networth requirements. This tantamounts to giving a head-start to the existing players, and heightens the overall regulatory uncertainty with respect to the entry of new applicants for PPI licenses.

Disproportionate networth requirements and restrictions on use of funds

Under the existing regulatory framework, PPIs are required to have a minimum paid-up capital of Rs. 5 crores and a positive networth of Rs. 1 crore. The DMD has dispensed with the specific capital requirement, but has increased the minimum positive net worth requirement to Rs. 25 crores. The DMD does not offer any rationale underlying such a five-fold increase. An ongoing minimum networth requirement of Rs. 25 crore is unjustified for the following reasons:

1. Disproportionate to risk: The minimum capital adequacy requirement for a business must cover the risks arising from the failure of the operations of the entity (a) to its consumers; and (b) where an entity is systemically important, to the financial system. PPIs are in the business of accepting money that is callable at par. They neither engage in lending activity nor do they pay interest to their consumers. They are not systemically important. Under the DMD, they are mandated to keep the funds received from consumers locked in an escrow account. Hence, there is virtually no settlement risk arising from the PPI itself. The two other risks that arise from PPI operations are operational failure and fraud. A five-fold increase in networth requirements without computing the risks and costs associated with these two failures, is arbitrary. It also does not take into account alternative methods for risk mitigation. For instance, the fraud-risk can be covered by insurance.
2. Inconsistent with global best practices: Several jurisdictions, such as the UK and Australia, specify a minimum initial capital and an ongoing risk based capital which is proportionate to the outstanding amounts deposited by consumers with the PPIs. Some jurisdictions, such as the UK, create a differentiated category of PPIs with lower or no minimum networth requirements, to foster innovation and competition in the payments space.
3. Restrictions on use of funds: As mentioned above, the DMD mandates non-bank PPI issuers to lock the deposits received by them from their customers in escrow accounts maintained with banks. This tantamounts to a 100% cash reserve requirement for entities which are not in the business of lending. Other countries have mitigated the settlement risk by permitting issuers to invest the funds in liquid and safe securities. For example, Australia mandates that such funds be invested in high quality liquid assets which are free from encumbrances. UK allows PPI issuers to safeguard the customers' money by obtaining insurance.

Mandating an excessive and risk-agnostic minimum networth requirement makes monitoring easy for the regulator, as it provides a 100% protection against failure. However, risk-agnostic capital requirements have the potential to create entry barriers for smaller players and stifle innovation. They increase the costs of services to consumers. The minimum networth requirements for PPI issuers must be proportionate to their operational risk. The 100% cash reserve ratio for PPIs must be dispensed with and they must be permitted to invest the outstanding amounts in safe and liquid securities, such as securities eligible for the Statutory Liquidity Ratio (SLR).

Over-prescriptive operational requirements, but weak on overall consumer protection

While the DMD is over-prescriptive on several operational aspects such as mandating technology-specific measures that PPIs must implement, it is weak on certain fundamental aspects of consumer protection. Instances of these flaws are enumerated below:

1. Paper based KYC for digital transactions: The DMD mandates a blanket full-fledged paper-based KYC process for all consumers. This is inconsistent with the risk-based approach towards KYC that is adopted the world over. A KYC mandate, that is agnostic to the risk associated with the person being KYC-ed, adversely affects both the payment service providers and the consumers. For the former, it implies a manifold increase in the costs of acquiring information. For consumers, it increases the cost of digital transactions relative to cash. Both these effects run counter-productive to financial inclusion and the objective of transitioning to a cash-less society. Moreover, a significant percentage of PPI users would have banking access and would have, therefore, undergone a full-KYC with a bank. Hence, for such consumers, applying KYC requirements for using funds lying in a KYC-compliant bank account is repetitious.
2. Over-prescriptive: The DMD mandates technology-specific anti-fraud measures such as an additional factor authentication for every transaction and separate log-in requirements for non-payment related services offered by PPI issuers. Over prescriptive regulatory requirements run the risk of being excessive and easily circumvented, especially in technology-oriented industries. Since consumers attach a premium to safe and secure payment systems, the private sector is incentivised to implement safe and consumer friendly systems. A principle-based approach towards regulating payments services is, therefore, the norm across countries.
3. Restricted interoperability: The DMD allows only restricted interoperability across payment platforms. For instance, monthly limits are placed on how much consumers can transfer back to the source account which was used to fund the PPI account in the first place. The DMD does not lay down a framework for full interoperability, but leaves it to a future date.
4. Limits on use: A PPI is a pre-paid store of value. The DMD seeks to limit the usage of the stored value and the number of beneficiaries that can be added within a given time interval. The regulatory purpose of such limits is unclear.
5. Ambiguity on usage of data: The DMD is ambiguous on the confidentiality obligations of PPI issuers. In this respect, the RBI is perhaps relying on the Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules, 2011 (IT Data Security Rules), which require service providers to frame a privacy policy. The Ministry of Electronics and Information Technology has also issued draft data privacy rules for the PPI industry. However, the DMD is silent on the minimum standards of data protection that PPIs must offer their consumers. In the absence of an overarching privacy law, it is also unclear who has the jurisdiction to regulate and monitor the privacy policies of regulated entities.

RBI must substitute the proposed blanket full-KYC process with a tiered risk-based KYC structure. Under such a structure, low-risk consumers, such as those whose monthly transaction volumes do not cross a certain threshold, or consumers who are able to link a bank account with their PPI, must not be subjected to the ordeal of a full-fledged paper based KYC process. Medium risk consumers should be allowed to use the AADHAAR-based e-KYC, and high risk consumers alone may be required to undergo in-person and paper-based KYC. The transition from low to high risk may be done on the basis of transaction history. RBI must also revise the operational norms for PPIs by making them principle-based and technology neutral.

Vague licensing procedure

The DMD lays down a new licensing procedure for PPI issuers. So far, the licensing of PPI issuers was governed by the PSS Act. The DMD, without amending the PSS Act, mandates a licensing procedure which significantly departs from that under the PSS Act. While the PSS Act allows RBI to issue regulations for the purpose of implementing the provisions of the PSS Act, a "Master Direction" that does not undergo Parliamentary scrutiny is not legally tenable for specifying a completely new licensing framework.

The new licensing process envisages an "in-principle" approval on the basis of the "prima facie eligibility" of the applicant. The criteria for meeting prima facie eligibility, are undefined, except that applicants and their management are required to meet a "fit and proper" criteria. Financial sector legislation around the world generally have a list of what constitutes `fit and proper', to ensure that a licensing process is not discriminatory owing to vague criteria. Further, the DMD requires applicants to satisfy parameters such as efficiency and other related technical requirements. It is unclear how RBI will measure efficiency for first-time entrants. The DMD allows RBI to impose additional conditions if adverse conditions regarding the entity/promoters/ group come to the notice of the RBI. Undefined additional conditions, which may be imposed on the occurence of undefined adverse conditions, adds to the uncertainty of the licensing process. It also creates a perfect setting for rent-seeking and ad-hoc discrimination among similarly-placed applicants.

A licensing process that is significantly different from that under the PSS Act, requires amendments to the PSS Act, and cannot be specified by a mere direction. A licensing process for PPIs must virtually be on-tap. An unambigious and competitively neutral licensing process is imperative for the development of a dynamic digital payments ecosystem in India.

References :

Ajay Shah, How to make digital payments work, Business Standard, 28 November 2016.

Report of the Committee on the Medium term recommendations to strengthen the digital payments ecosystem (2016) or commonly called The Watal Committee report.

The authors are researchers at the Indira Gandhi Institute of Development Research.